When it comes to running a business, there are a lot of expenses incurred during operations. As of January 2024, New York University’s Stern School of Business had recorded nearly $1.2 trillion in capital expenditures by U.S. sectors. Considering this, there are two important concepts that are imperative to study for effective accounting treatment: capital expenditures (CapEx) and operating expenses (OpEx).

Defining CapEx and OpEx

Operating expenses (OpEx) are required outlays a company incurs on a more frequent basis to take care of day-to-day expenditures. Capital expenditures (CapEx), conversely, are larger purchases that businesses intend to use over the long term (at least 12 months). 

Different Considerations

OpEx

This type of asset is more of a short-term consideration. Expenses that fall under this category include utilities, wages, rent, taxes, selling, general and administrative expenses (SG&A). Unlike CapEx, businesses may benefit from tax deductions for these types of expenditures as long as the business incurs the expense during the same tax year. These expenses reduce a company’s net income. However, they are not eligible for depreciation, which is how CapEx reduces a business’ net income. Since the entire expense is recognized right away, they’re reported on the income statement.

CapEx

This type of asset is intended to have a useful life of more than one year. Examples of these types of assets include warehouses, data centers, work trucks, etc. Many of these items fall under PPE or property, plant, and equipment (PP&E) on the balance sheet. On the cash flow statement, it can be reported under the investing activities section.

Since these items are intended to last for a considerable time frame, such investments are planned to improve the profitability/capabilities of the business. Unlike OpEx, these expenditures are not tax deductible. It’s also important to understand this applies to intangible assets, such as patents, goodwill, etc.  

These types of assets are financed by either collateral or debt. Businesses also can issue bonds or get creative with their financing partners. Listed as a capitalized asset on the balance sheet, it’s depreciated over the asset’s useful life. However, it’s important to note that land is not depreciated.

Considerations between CapEx and OpEx

When it comes to CapEx, it’s important to know that some transactions can be paid for during the acquisition period, but acquisition costs can also occur over multiple accounting periods if it’s a long-term project, such as building a manufacturing plant or warehouse.

CapEx can determine the financial health of a company. If a company can reinvest in itself through patents, machinery, equipment, etc., along with maintaining or increasing its dividend payments to shareholders, then the company is on solid financial footing.

Depreciation for CapEx items is advantageous for companies because it provides a balance to the investment by lowering the company’s net income.   

There is another reason why both types of expenses exist. OpEx is a better choice if a business wants to be more agile and protect capital. CapEx would be used if a business is aiming to invest for long-term profitability and competitiveness.

Understanding how these two expenses are classified and accounted for is essential for businesses to navigate the accounting requirements and tax code effectively.

Sources

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/capex.html

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